June 2013 Archive for Dairy Talk

Where the silver lining and opportunity for dairy may yet be.

Call me a glass-half-full type of kind of guy and a hapless optimist. But the House of Representatives’ failure to pass a farm bill last month might have a silver lining—and might create an opportunity for a better farm bill down the road.

The failure to pass the bill creates the opportunity of the dairy industry to actually come together – producers, co-ops and processors.

It’s clear (at least to me) that market stabilization is dead on arrival in the House. Some would argue that even with its demise, the House failed to pass the farm bill. Even the Goodlatte/Scott amendment sponsors, Rep. Bob Goodlatte (R-Va.) and David Scott, (D-Ga.) failed to vote for the final bill.

But the overwhelming vote for Goodlatte/Scott, 196 Republicans and 95 Democrats, means market stabilization has little chance of passage. It’s unlikely market stabilization proponents could sway many Republicans to their side, leaving all the heavy lifting to Democrats.

And if market stabilization raises milk prices (as it’s designed and intended to do), it will be difficult to convince another 79 Democrats that raising milk prices for poor, urban consumers is a good thing to do. Click here for the House vote breakdown on Goodlatte/Scott.

With market stabilization off the table, it makes sense to revisit the premium levels for margin insurance. Initially, I believe the premiums for moderate levels of margin insurance were set low to encourage producers to participate. If participation was too high, the market stabilization leg was there to rein in production.

The National Milk Producers Federation is right that high levels of margin indemnities could prove problematic in milk market recovery if surpluses build or there’s a crash in export markets. Offering highly subsidized premiums in this potential environment makes little sense.

It also makes sense to revitalize the Livestock Gross Margin-Insurance (LGM-Dairy) program as well. The margin insurance program is a one-size-fits-all approach. LGM-Dairy allows producers to better tailor their insurance program to their individual rations and markets.

But the on-again, off-again nature of LGM-Dairy has to change if there is any hope of producer participation. Other tweaks are needed as well, including making the program accessible to producers in Class IV markets.

If these tweaks are made, the entire industry must then come together to push for passage of the farm bill. Getting it passed will be tough enough. Arguments over food stamp cuts will again be paramount.

But if dairy issues can be taken out of the debate and the collective will of dairy producers, NMPF and processors is harnessed to pull for passage, the farm bill stands a far better chance.

Dairy’s controversial market stabilization program comes under the spotlight this week.

The U.S. House of Representatives begins its long-anticipated farm bill debate today. For dairy, the debate will center on whether or not to include the Goodlatte-Scott (G/S) amendment, which would strip the market stabilization program from the Dairy Security Act (DSA).

For the dairy industry, this debate has been years in the making—both figuratively and literally. Last year, the House Republican leadership refused to bring the farm bill to the floor. Some say dairy—supply management, in particular—was the reason that the Republicans refused to move the bill. Others say cuts to food stamps—just prior to the 2012 elections—were the real reason Republicans wanted to avoid the debate.

Finally, this week, we will have the debate. Proponents of Goodlatte-Scott say a market stabilization program will impede growth, hurt dairy exports and (according to the Congressional Budget Office) cost the government more. Opponents say that without supply management, there could be prolonged periods of low margins that could ultimately cost the government billions in margin insurance premiums. Such run-away government costs would ultimately doom the program—if not immediately, then in 2018 when it would be up for renewal.

Both sides have a point. But I think the biggest problem with market stabilization will be its implementation. It will be extremely messy to administer. It will be even tougher to implement on the farm, not knowing if you have to cut back for one month, or two, or six. And farmers—being farmers—will find ways to work the system. That is inevitable. Even Collin Peterson (D-Minn.), the ranking minority member of the House Ag Committee, has admitted there is more fraud in crop insurance than there is in food stamps.

The problem lies in the premium subsidies of the margin protection program. Most dairy brokers say it takes at least 50¢ per cwt. using conventional risk management tools such as forward pricing, futures contracts and options to do a proper job of managing risk. But DSA and G/S write into law premiums that don’t approach the 50¢ threshold until $7.50 margins.

At these levels of subsidies, producers will flock to these programs. Like crop insurance, they virtually take the market risk out of farming. But that begs the question: Do we want the farm bill, aka government, to eliminate risk, skewing markets in the process? Exhibit A: Ethanol, corn markets and land prices.

Marin Bozic, a University of Minnesota dairy economist, adds that there is a third option—Livestock Gross Margin Insurance for Dairy. It’s still in the farm bill, but has been under-utilized because it has not been consistently offered. Again, government is subsidizing premiums. When those subsidies run out, LGM-Dairy is not offered.

But the beauty of LGM-Dairy is that it’s not a one-size-fits-all program. Dairy farmers can actually base their insurance coverage on their own rations and how much milk they want covered. So why not take some of the premium subsidies being thrown at DSA and G/S, and put that money toward continual coverage of LGM-Dairy?

Farm bills should provide catastrophic risk protection. But they should not totally insulate anyone from market forces.